Steady development: New outlets are transforming the retail make-up

Indonesia has a fast developing retail sector, and all signs point toward it evolving quickly from highly fragmented and basic in terms of quality, service and efficiency to one similar to advanced ASEAN countries, with modern trade outlets and large groups leading the way. Indonesian consumers are active and increasingly prosperous. Firms are investing and quickly upgrading, and are under considerable pressure to improve given the fast rise in wages and the need to better manage their operations. The physical environment is also supporting change: traffic and the lack of public transportation encourages the establishment of well-placed and well-run convenience stores. Indonesia is a country on the cusp of a massive change in the retail sector.


However, resistance to the larger trends is considerable. While modern trade will grow, it will have to evolve with an eye toward various interests. The government has long been pushing back against overdevelopment – as evidenced by a 2011 decree for a mall moratorium in Jakarta – and it is doing its best to support and encourage small markets and mom-and-pop shops. Consumers, however, are changing their buying habits by shopping at minimarkets instead of traditional stores, for example.

Meanwhile, the general economic background is throwing greater development further into question. Indonesia is becoming more nationalistic and protectionist. Its new trade and industry laws empower the government to protect the economy by setting up barriers and actively promoting sectors. In this environment, the retail sector might come under fire, as it has the potential to increase the trade deficit with imports. In an election year like 2014, modern trade could find the market more challenging than expected.

Big Moves

According to data from Euromonitor that was published by the US Department of Agriculture, the market share of major modern retail chains has been growing steadily over the past decade. Traditional retail was 74.2% of all retail in 2002. That was down to 55.8% by 2011. In that time, minimarts went from about 4.9% to 22.4% of the total, while super markets and hypermarkets held steady at about 20%. Much of the gap has been filled by the growth of convenience stores.

Perhaps the most significant development was the arrival of 7-Eleven in 2009. While Indonesia has had convenience stores for more than two decades, the Japanese-owned chain lifted the standard and expanded quickly. Currently, the country has five dominant convenience store players. They are 7-Eleven, Circle K, Lawson, Indomaret Point and Family Mart, which together control about 80% of the market, according to Indonesian bank CIMB. The overall market, according to the bank, grew from 105 stores in 2008 to 415 by 2013.

Circle K – the first convenience chain in the country – is the largest, with 179 locations in 2012, according to CIMB. 7-Eleven was the second largest, with 129 outlets in the first half 2013, followed by Indomaret Point, with 86 stores in the first half 2013. Lawson, the Japanese brand, had 84 points in 2012 after just two years of operation. A new entrant is Ministop, which opened two stores in Jakarta ins 2013. Two chains, Bright and ampm, have been closing stores. Following the trend in other countries, the Japanese chains are fast expanding and quickly marginalising exiting players.

Push Back

In 2012 and 2013 new regulations were issued that limited the growth of global chains to ensure that locals are included in the expansion. These laws required, among other things, that minimarts limit their outlets to 150, after which additional outlets have to be 40% locally owned. Also, 80% of the raw materials used in products sold and 80% of equipment in the stores must be locally produced. The rules also apply to small supermarkets and department stores. Meanwhile, food and beverage outlets are limited to 250 units, and firms were given five years to comply.

The government has been in dispute with the Japanese chains, which has heated up considerably in 2013.

Since at least 2012, the Ministry of Trade has challenged 7-Eleven and Lawson licences. According to the authorities, the outlets have restaurant permits from the Ministry of Culture and Tourism. However, because they sell consumer goods, they are retail outlets, which should be owned by Indonesians and be licensed by the Ministry of Trade, the government contends.

In early 2014 public order officers gave notice to half the 7-Elevens in Jakarta that they did not have the right permits: 29 lacked operating permits and 31 lacked permits to sell food. Jakarta governor Joko Widodo weighed in in early January 2014 as one 7-Eleven outlet remained open despite a window sign saying that it had been ordered closed. Widodo said keeping the stores open challenged the authority of the government, and that if they continued to violate the order, the state may be forced to level the shops. Hours later, the outlets were shut, but the firms insist they have the right permits.

Growing Protectionism

The current mood in Indonesia tends to be inward looking. The feeling in the country is that it has tried to open its markets, only to be the subject of dumping from countries that have not been nearly as open. Nationalism is on the rise despite commitments Indonesia has made to both the World Trade Organisation and ASEAN. In the run up to the July 2014 elections, politicians will be inclined to favour policies that err on the side of protecting domestic businesses. Retail is particularly vulnerable, as international brands and marketing attracts a good deal of attention regardless of the value underlying businesses leaves in the country.

The small-scale retail sector also has a strong cultural connection for many Indonesians, especially the warung, small family owned businesses. The government is always careful to support the small local shop owner because history has shown the political importance of keeping these retailers on its side. In late 2013 the Jakarta governor said that a tax to be levied against food stalls, as outlined in a 2011 bylaw passed by his predecessor, will not be enforced. A restaurant with more than Rp200m ($20,000) of sales was required to pay a 10% income tax under the statute. The current governor said that food stall owners and their relatively poor customers should not be made to bear the burden.


Momentum will help maintain the status quo without government help. According to some research, the majority of transactions are conducted via traditional channels, which will remain the case for years. A 2013 report by global consultancy Bain & Company puts the percentage of grocery transactions via traditional channels at 85.2%. Of the rest, the majority was delivered via minimarkets and convenience stores. But modern trade channels are growing fast, the report states. According to calculations, the hypermarket segment will grow 13% between 2007 and 2017, the supermarket segment 12% and convenience stores and minimarkets 23%. Traditional channels will grow 8% in that period. However, traditional retail will still make up 82.3% of grocery sales by 2017, and modern trade will not catch up until about 2030. “There is a place for the traditional retailer. The space has stabilised,” Catherine Eddy, managing director at Nielsen Indonesia, told OBG. “The wet markets have responded by upgrading. I cannot see the wet markets becoming irrelevant.”

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The Report: Indonesia 2014

Industry Retail chapter from The Report: Indonesia 2014

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